Target-Date Funds Underestimate Retirement Risks

Target-date funds (TDFs) now represent a foundational building block of U.S. defined-contribution savings but carry structural exposures that may leave retirees short of income goals. Industry tallies show assets approaching multiple trillions of dollars, concentrated in a relatively small set of vintages and glidepath designs; that scale creates both concentration risk and policy externalities for plan sponsors and participants. The conventional value proposition—one-ticket simplicity that automatically de-risks toward retirement—rests on assumptions about returns, withdrawal behavior and volatility that have proven fragile in market stress. This piece assesses the empirical record, quantifies where the gaps are, compares TDF performance and design to benchmarks and peers, and outlines the implications for fiduciaries, plan participants and asset managers.

Context

Target-date funds have become a default option in many retirement plans, reshaping asset flows in equities and fixed income. According to Morningstar Direct, TDFs managed roughly $3.6 trillion in U.S. mutual fund and ETF assets as of December 31, 2024, up about 6% year-over-year from approximately $3.4 trillion at end-2023 (Morningstar Direct, Dec. 31, 2024). The Investment Company Institute estimates that more than 20 million U.S. retirement accounts use TDFs as a primary vehicle; the concentration of participant assets in a small number of vintages and large fund families amplifies governance questions (ICI, 2025). The core appeal—automatic lifecycle asset allocation—has driven market share gains, but scale also means any design flaw affects a large swath of future retirees’ wealth.

A key design input is the glidepath: the schedule by which asset allocations shift from higher to lower risk as participants approach and enter retirement. Glidepaths vary materially between providers. For recently popular vintages (e.g., 2045–2050), the median equity allocation at or near the target date remains near 56%, according to aggregated glidepath data from major providers in 2024 (Vanguard/BlackRock/State Street public glidepath disclosures, 2024). That level is substantially higher than many participants assume when they select a single 'target-date' fund—participants often interpret the label as implying a retirement-ready portfolio, rather than a portfolio still carrying meaningful market risk.

The broader macro backdrop accentuates these design sensitivities. Persistently higher interest rates and compressed bond returns mean fixed income now contributes less to total portfolio returns than in the 2010s, forcing glidepath designers either to accept lower expected returns for a conservative allocation or to maintain higher equity exposure to chase returns. This trade-off is central to why TDFs with similar names can produce different outcomes for retirees: identical labels mask materially different asset mixes and expected return profiles.

Data Deep Dive

Three data points illustrate the structural parameters and the risk they create. First, assets: Morningstar's $3.6 trillion figure (Dec. 31, 2024) underscores scale; the top ten TDF series manage a majority of those assets, increasing systemic exposure to a small group of manager decisions (Morningstar Direct, 2024). Second, equity exposure: the median equity weight at the target date for popular 2045 vintages was roughly 56% in 2024, with some providers as high as ~65% and others below 50%—a 15 percentage point range that matters to expected volatility and sequence risk (Provider glidepath disclosures, 2024). Third, fees: the weighted-average net expense ratio across mainstream series was approximately 0.34% in 2024, down from about 0.41% in 2018, reflecting fee compression but also increasing scale benefits for larger families (Morningstar, 2024).

Sequence-of-returns risk—the vulnerability of a portfolio to negative returns early in retirement—remains the most material behavioral risk for retirees invested in TDFs. Vanguard research and subsequent academic studies have shown that a large negative return in the first five years of withdrawals can reduce portfolio longevity dramatically; for example, a 20% decline in the early retirement years can lower the sustainable safe withdrawal rate by roughly 0.5–1.0 percentage points, depending on the asset mix and subsequent returns (Vanguard Research, 2018). That sensitivity is amplified when the TDF glidepath keeps equity exposure elevated at the target date: a 56% equity share increases volatility and the chance of a damaging early sequence compared with a more conservative 40% equity exposure.

A comparison to a static 60/40 benchmark highlights another issue. Over long rolling 10-year windows ending in 2024, average TDF returns have generally tracked but not consistently outperformed a blended 60/40 benchmark net of fees; differences in downside protection and glidepath shape drive large dispersion across vintages and providers. In the 2018–2022 drawdown window, some TDF vintages outperformed 60/40 due to faster de-risking, while others underperformed because they maintained higher equity allocations into the market troughs (Morningstar performance analytics, 2024). These intra-product differences are not always transparent on fund marketing materials.

Sector Implications

For asset managers, the TDF market is both an opportunity and a reputational risk. Large scale provides economies of scale—lower custody and operational costs, bargaining power for securities lending and lower per-dollar administrative expense—but it also concentrates fiduciary scrutiny. The top 5 asset managers account for the majority of TDF assets; any material design misstep, opaque glidepath communication or persistent underperformance invites regulatory attention and plan sponsor replacement risk. From a product strategy perspective, managers face a trade-off between offering diversified series to capture more plan flows and keeping product lineups simple to avoid participant confusion.

Plan sponsors and fiduciaries must reconcile ease-of-use with duty-of-care obligations. The default and ‘qualified default investment alternative’ (QDIA) framework presumes a one-size-fits-most solution, yet the evidence indicates that participants have heterogeneous retirement horizons, savings rates and risk tolerances that a single TDF may not accommodate. Several plan sponsors have responded by offering TDFs with more conservative retirement allocations or by providing customized in-plan retirement income solutions, which can lower sequence risk but increase administrative complexity and cost.

Regulators and policymakers are watching. The Department of Labor has signaled interest in clearer disclosures and in ensuring that TDF labels do not mislead participants about retirement-readiness. Enhanced glidepath transparency—standardized reporting of equity allocation at target, historical worst-case drawdown scenarios, and assumptions about retirement spending—would help fiduciaries make more informed selections. For institutional investors, the TDF market dynamics affect broader capital markets by directing long-term flows into specific equity and bond buckets, which has implications for liquidity and pricing in certain segments.

Risk Assessment

The most immediate risks are sequence-of-returns and longevity mismatch. A TDF that still holds a majority of equities at the target date increases the probability that a retiree will experience an early negative shock that permanently impairs income. For example, real-world retiree cohorts that retired into the 2000–2002 and 2008–2009 downturns suffered materially lower replacement ratios than cohorts that experienced benign early retirement markets; these historical episodes illustrate how timing risk compounds behavioral leakage such as increased withdrawals or spending adjustments (Historical cohort analysis, 2000–2010).

Modeling assumptions embedded in glidepath construction create additional hazard. Many glidepaths assume average return environments and moderate volatility; they rarely stress-test outcomes under simultaneous low-rate and high-volatility regimes. As a result, expected return projections embedded in forecasts can be optimistic. The plausibility of extended periods of low nominal bond yields and higher equity volatility would materially reduce the expected real returns of typical TDF mixes, making a 4% withdrawal rate less sustainable than models might imply.

Operational and governance risks are non-trivial. The concentration of assets in master trust structures and in omnibus share classes can create operational dependency on a small set of custodians and sub-advisors. Fee compression has reduced visible drag, but it has also pushed managers to seek liquidity and auxiliary revenue sources (e.g., securities lending, passive management scale), which may have different risk-return profiles in stressed markets. From a fiduciary perspective, plan sponsors must document why a chosen TDF series is the QDIA and how it meets participant needs, or they face replacement risk and potential litigation after adverse outcomes.

Fazen Capital Perspective

At Fazen Capital we view the proliferation of TDFs as a structural shift in retirement provisioning that requires a recalibration of due diligence standards and participant education. Our contrarian observation is that the market has overemphasized simplicity at the expense of tailoring: the most consequential decisions for retirement outcomes—savings rate, retirement timing and withdrawal behavior—are behavioral and plan-specific, not product-technical. A well-designed TDF can be a useful core holding, but treating it as a turnkey solution for retirement income is optimistic without complementary measures such as glidepath transparency, optional conservative vintages and in-plan income features.

We also see strategic opportunity for fiduciaries and asset managers to differentiate through governance and disclosure. Standardized reporting—equity weight at the target date, historical rolling worst-case drawdown over 5- and 10-year windows, and modeled replacement-rate sensitivities at withdrawal rates of 3.5%, 4.0%, and 4.5%—would raise the bar for product comparability and help sponsors make materially better QDIA choices. For institutional investors assessing manager partners, we recommend stress-testing glidepaths under low-return/high-volatility scenarios, explicitly modeling sequence-of-returns impacts and documenting participant behavioral assumptions.

Finally, from a capital markets perspective, the growth of TDFs means asset managers should anticipate continued demand for liquid, large-cap equity and high-quality fixed income paper that fits glidepath needs. Managers that can supply scalable, low-cost building blocks while offering enhanced retirement income wrappers—longevity hedging, in-plan annuity windows, or guaranteed withdrawal features—are likely to capture incremental market share. See our related commentary on target-date funds and retirement strategies for implementation considerations.

Bottom Line

Target-date funds are indispensable in modern retirement plans but are not a panacea; fiduciaries and participants must confront sequence-of-returns, glidepath heterogeneity and disclosure gaps to safeguard retirement outcomes. Greater transparency, standardized metrics and stress-testing will be pivotal to align product design with participant realities.

Disclaimer: This article is for informational purposes only and does not constitute investment advice.

FAQ

Q: How have TDF assets changed recently and why does that matter? A: TDF assets grew to roughly $3.6 trillion by Dec. 31, 2024 (Morningstar Direct), up ~6% YoY from end-2023. Growth matters because concentration amplifies the consequences of design choices: when a handful of series manage a large share of retirement assets, their glidepath decisions shape many retirees' outcomes simultaneously.

Q: Are all target-date funds the same at the target date? A: No. Glidepaths vary; in 2024 median equity weights at the target date for popular vintages were about 56%, but provider allocations ranged from under 50% to ~65% (provider disclosures, 2024). That spread creates materially different volatility and sequence-risk profiles for retirees who assume 'target date' means retirement-ready.

Q: What practical steps can plan sponsors take now? A: Sponsors should demand standardized glidepath disclosures, run stress tests under low-return/high-volatility scenarios, consider offering conservative vintages or in-plan income options, and document fiduciary rationale for the selected QDIA. These steps reduce governance risk and better align plan design with participant retirement objectives.

Disclaimer: This article is for informational purposes only and does not constitute investment advice.